Excerpt from Professional Corporations – How Do I Deal with Passive Income?

A key advantage of a professional corporation is the ability to accumulate equity faster than through a sole proprietorship. You can earn money, pay tax at the low corporate rate, and then accumulate all those extra dollars inside the company. This works incredibly well if you don’t have to pay personal tax on your passive income at 50 per cent. Unlike active income that is taxed at lower corporate rates on the first $500,000, investment income is taxed at higher corporate rates beginning with dollar one. The table in appendix A (page 355) shows the corporate tax rate on various forms of investment income in each province or territory. This is where the services of a qualified financial planner can be worth his, or her, weight in gold. They can help you decide where to draw income from and when and where to use eligible and other than eligible dividends.

This is especially true given tax changes affecting private corporations introduced in the 2018 federal budget. As alluded to in previous chapters, this change in legislation pertains to a reduction in a company’s small business limit as it earns a higher amount of passive income. Currently, Canadian Controlled Private Corporation’s (CCPC) see preferred tax rates on active business income up to the small business limit within their province ($500,000 for most provinces). However, the 2018 Federal budget announced that CCPC’s would see their small business limit reduced by $5 for every $1 of passive investment income over $50,000/year. As such, the business limit would be eliminated for companies with $150,000/year in passive investment income in provinces with a $500,000 small business limit.